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Sunday, July 11, 2010

BEAR'S BEWARE II

In my last article Bear's Beware, I warned that shorts were running the risk of getting caught in an explosive rally as the intermediate cycle was due to bottom. Well, it did bottom and bears have watched their profits quickly evaporate as the market has surged out of the intermediate cycle low.

The initial thrust out of one of these major cycle bottoms will usually gain 6-10% in the first 8-13 days. We are now 5 days in and up 6.6% so far. I expect we will see a test of the 200 day moving average before we see any significant pull back. These initial moves out of intermediate bottoms don’t tend to wait around as smart money smelling blood in the street pile in quickly.

It's only the little guy, who doesn't understand what has just happened, that continues to fight the trend change. This is usually about the time that I see the technicians start calling for this or that resistance level or trend line to put a halt to the rally. They are, of course, assuming this is a bear market rally and it will soon be over.

First off, let me say I'm not convinced yet that the cyclical bull is dead. I would need to see the market come back down and break the recent lows first. If both the transports and industrials do that then yes, we will have a Dow Theory sell signal and at that point I would have to assume that the market has begun the third leg down in the secular bear market that started in March of 2000.

Now let me say this, bear markets don’t begin because of lines on a chart. They begin because something fundamental is broken in the economy or financial system. Now we certainly do have a broken financial system, no doubt about it, but then again this cyclical bull was never built on the foundation that we had fixed anything in the financial sector. We certainly haven't fixed anything in the economy with unemployment remaining above 15% if one counts everyone out of work. No this cyclical bull was built on a foundation of massive liquidity. I’m not convinced yet that that fundamental base is broken. Only time will tell.

But even if this is a bear market rally let me assure you that bear market rallies don’t end because of lines on a chart. If you think you are going to spot a top in a bear market rally by drawing a few trend lines or some meaningless resistance level you are just kidding yourself. It ain’t gonna happen. It never has and it never will. Lines on a chart don’t halt bear market rallies anymore than they initiate bear markets.

I’ll tell you exactly what halts a bear market rally. Sentiment! Sentiment, at every single one of those rallies during the `07-`09 market, reached bullish extremes. Not one single rally was halted by a pivot point or resistance level prior to sentiment reaching extreme bullish levels.

Even after the recent surge, sentiment is still so depressed that it’s at levels lower than most of the intermediate bottoms during the last bear market. So let me tell you, if you think the market is going to turn tail and run because it hits the pivot at 1130 or the 200 day moving average, or because you think earnings aren’t going to be rosy, you are going to be sorely disappointed.

If this truly is a bear market then before you even begin to look for a technical turning point you first have to wait until sentiment does a 180 degree turnaround. That just doesn’t happen quickly after the kind of beating we just got.Trust me, it’s going to take a while for investors to forget a 17% correction and dare to become bullish again. If I had to guess I would say at least 8 to 11 weeks. Even longer if the next half cycle (due around day 15-20 of the rally) and full daily cycle correction (due around day 35-45 of the rally) are strong enough to scare investors again.

The problem with the move out of February bottom was that we got no corrections and it quickly turned into a runaway move. Those kind of rallies tend to end with some kind of mini-crash. I started telling subscribers there was a high possibility of that back in late March and early April. It happened in Feb. of '07 with the China crash and sure enough, it happened again in May with the flash crash.

Traders become extremely complacent during one of these runaway moves. At the April top sentiment had reached levels more bullish than at the top of the last bull market. As usual, we paid a heavy price for that complacency. But now we've swung 180 degrees back in the other dierection, with sentiment so depressed it even makes the `09 bottom look positively giddy. That my friends is the base for another powerful rally.

Actually I won't be at all surprised if the market rallies back to new highs ... even if we have begun the initial topping process of this cyclical bull. Remember the bear market had already begun in the summer of `07 but that didn't stop it from rallying back up to marginal new highs in Oct. before finally rolling over into the second worst bear market in history.

This idea that the markets can somehow magically look into the future is just ludicrous. I can assure you no one can see the future, and that includes the millions and millions of investors that make up the global markets.

Now let me say this - we already know where the cancer is. Does that mean the stock market will now start to discount the next bear market? In the summer of `07 we knew the cancer was in the credit markets, initially beginning in the subprime mortgage market. Did the market look into the future and discount the unraveling of the global credit markets at that time? No it did not. The stock market rallied to new highs.

Well, we already know what will eventually bring this house of cards down, it's already started just like it had already started in the summer of `07. We are going to have one sovereign debt implosion after another and that is going to lead to the cancer spreading through the global currency markets eventually infecting the world's reserve currency.

But don't expect the market to look ahead and begin discounting the unraveling of the global currency markets. Markets don't do that. What they do is slowly recognize the fact that the fundamentals are broken. Once enough traders realize that, the markets begin to roll over, usually in an extended process taking many months.

I doubt this time will be any different, especially since the central banks of the world are going to fight the bear with a blizzard of paper. Don't make the mistake of thinking the markets have to act rationally. They don't and won't. If the Fed prints enough money markets are going to rise even though the global economy is crumbling all around us.

If you are bearish and determined to pit your stash against Ben's printing press I'm afraid you are signing up for one very difficult time ahead. I seriously doubt we are going to see another credit market implosion like we saw in `08. Without a severe dislocation like that there will be no market crash this time. When the bear does return (and he will eventually) the next leg down is going to be a long drawn out process with multiple violent bear market rallies. Selling short in that kind of market isn't going to be easy. As a matter of fact I doubt 1 bear in 10 will even manage to make money in that kind of environment.

Bear's should be careful what they wish for. I suspect the next leg of the secular bear will manage to destroy both bulls and bears alike.

130 comments:

If you go to the link (upper right hand corner of the home page) there are several free reports you can look over to get some idea what subscribers get. I've also unlocked the June 28th report. Be sure to read it as it will layout my goals in publishing the subscriber newsletter.

That way you will know quickly if the newsletter is for you. Basically if you are looking for someone to pick stocks and guide you through day trading strategies I'm not going to be your man.

We've had lower highs and lower lows since the April 26th top, we have a little 3 day rally out of some oversold conditions, and yet again Gary our host is still (for some totally unknown reason) repeating his 'the bear is not back yet' nonsense!

Just a month ago he was saying 'we need to see a series of lower lows, and take out the Feb low of 1044, before he would consider it a trend change.

Well, well...now we have seen all of that, and a little 3 day relief rally has him changing his tune again!

He slates lines on a graph, yet how many times do we see a gold chart with 'the only bull market' noted within it. Maybe if he turned an S&P chart upside down, he'd day the same!!

I used to think he maybe just didn't quite grasp a topping process, but now I wonder if the PPT has him as part of the 'pumping team'?

Folks, trading this thing is a piece of cake...load up with long-dated puts, or open-ended shorts, and just sit back and enjoy the ride... it may take a day or 2 to drop the 30-40% that is coming, or it may take several months. Who cares, just let it come to you.

And please don't make your equity trading decisions based on the schizophrenic ramblings of this guy, he may know gold, but not much else.

Read the post again. I said if the market comes back down and breaks the recent low (which should be the secondary low I've been looking for) then we will have a Dow Theory sell signal and that would be the final confirmation that the bear is back.

Anyone buying long dated puts is an idiot. If the Fed prints enough money they can abort a bear market or at least greatly extend a cyclical bull. Did you learn nothing from the 02-07 bull market.

We already seen the Fed abort a left translated 4 year cycle.

I have no idea why you are in such an all fired hurry to call a bear market. Even in the worst circumstances these things take time to roll over.

Gary_UK, I learned my lesson, to not bet against The Fed. I shorted the market 18 months before the Oct./Nov. '07 crash, and tripled my money (I made one bet with everything that I had).

I was convinced that the economy was in terrible shape (and still am), and went for a smaller short bet, beginning in Jan. '09, riding it until earlier this year. I lost 85% on that bet (fully offset, thank goodness, by gains in SLW, gold, and silver).

Ben and the shysters/schmucks/shylocks will soon have their back up against the wall. I presume they will print, just as they did last year. I will only make small, limited duration short bets, and will keep the 95% of my money now in gold, silver, and SLW just as is.

In fact, it appears that Ben and the cabal may be printing already:http://www.zerohedge.com/article/guest-post-fed-funding-treasury-through-banks

Gary_UK is misses the point. Gold going higher is a far higher probability than stocks going lower, even if neither trade works. Both Garys think stocks are going lower, they only differ on the time prediction. Meanwhile, gold continues to be best trade on the long side, with the most potential of all ideas.

(And nice rebuttal to Gary_from_UK. Is there some way to block this guy from commenting? His posts don't add anything of value, and it seems like he's basically trolling. But it's your blog, you make the call.)

I don't think anyone here believes for a second that the secular bear has ended, certainly not me. We haven't reached true secular bear market bottom conditions yet.

I'm just not convinced that the cyclical bull is dead yet. And the secular gold bull is most certainly not dead. It still has a long way to go yet.

As long as that remains the case it's just senseless to try and fight with a bear market. The gains will be minimal compared to a bull and they are going to be incredibly hard to come by.

Gary,You don't seem to understand the mathmatics involved in bull and bear markets. If you did you would never waste your time trying to short stocks as long as the secular gold bull is alive and well.

Not only does Gary_UK not understand basic math, he doesn't read too well, either.

Many here are up much more than short-side stock traders, no matter what time frame we use, other than only the last 2 weeks. The bottom line is that gold is still near all time highs, while stocks are still 60% off their lows, even after the last month or so 20% selloff.

If Gary_UK could read, he'd see we mostly agree stocks are going lower in time, but that gold going higher is the much better trade and with more upside. Inflation/deflation debate is just a distraction. Gold loves deflation, and hyperinflation, just not steady, low inflation.

Gary, cutting to the chase, I believe you are wrong, the cyclical bull is over, and I see no evidence to back up your claim that we go higher.

End of discussion, the rest is just your fairly typical smokescreen, I choose how I make my cash, you choose yours, on this one issue I believe you are wrong, and I am right, and you have been fighting this (for some reason) even as we made a 1010 new low for the year.

I couldn't care less what all of your followers say re gold, I hope you all make huge profits there. Doesn't make other trading strategies wrong, you goldbugs are so tunnel-visioned though, makes me chuckle. You all forget deleveraging 2008, and the carnage in gold stocks. Odd that I don't?

Do you feel gold is now going to enter a bear market? Or is it that you think gold is in a bull, but going to get hit hard, exactly like '08? Are you planning to buy gold into your anticipated decline, or is it the end of the gold bull, in your opinion?

I don't need the concern of goldbugs, I do fine with my swing trading thanks, and there is no pain involved. Do you feel pain when the gold price falls 5% in 30 mins? Same here with a relief rally in eguity markets.

Can't see why that is so hard to grasp.

Oh well, just trying to avoid folk going long here and losing a bundle.

And, I do think gold will come down to around $1000, but will hit $3000 in a year or two's time.

So you're not interested in making 300% from $1000 to $3000? That sounds like a goldophobe, which is even more crazy than a gold bug when 300% potential return is acknowledged. Will you buy gold at $1000?

What is the most stocks will decline, 50 or 80% if you're really lucky?

5% pullbacks aren't as painful as UK suggests, when you're up 25%+ before the decline occurs, and you're on the right side of the trend and surprises. My trading has taught me there is not big money in calling trend changes, as they fake out, then resume the trend more often than not.

(I know your timeframe is measured in years, US Gary), this is an interesting day to have this argument.

Equities have been all one could ask off the bottom for a bull, imo. Today's pullback was shallow and constructive, with SPY now back to the unchanged mark. UK Gary, we may be in a bear market, but I think your swing short is quite premature. I'd much rather be long than short SPX at the moment.

Not sure I'd say the same for PMs right now. The high-volume selloff on July 1 has turned the 50dma into a barrier gold has been unable to cross, and miners continue to confirm the weakness.

Oil is just as down as gold today, yet OIH/XLE are only slightly underperforming the market, while the miners cling to the lows.

I'm not trying to sow seeds of doubt or antagonize anybody, but those of us hoping/expecting to see PMs lead the market out of the recent low are more than a little disappointed.

It all depends on if you look at things like a trader or a value investor.

A trader sees gold pulling back and assumes the recent action will continue so he says "ugh it looks terrible"

A value investor sees gold pulling back and understanding the secular trend is up, knows that he is witnessing an opportunity in the making. Gold is being put on sale.

The value investor doesn't worry about the short term movements, all he cares about is that he is getting a chance to buy gold cheaper than a couple of weeks ago.

If he's really asutue he also understands that golds intermediate cycle is now going on week 23 and these things rarely last longer than 25 weeks. So he knows gold is getting close to a major intermediate bottom. He understands that even if he doesn't time the exact bottom he shouldn't have to wait long for the intermediate trend to reverse and the secular trend resume.

I understand that's your view, Gary, and I'm not really faulting it. I realize you spend 80 percent of your time on this blog combating the short-term trader's mentality and focusing on the big picture.

Just making small talk while we await the next move, up or down. I know you find technicals the least compelling tool for evaluating markets, but right now the technicals for gold seem pretty tired, imo.

Hey, if you're making money swing trading the equities markets, good for you. Keep doing what you're doing.

Many traders/investors have trouble making swing trading work for them (i.e. making it profitable). Those folks prefer finding a long term bull and getting on that train. They will likely not make as much money over time as a successful swing trader, but they will make money as long as the train they've jumped onto is indeed a bull.

I've never posted here before, but I wanted to share my investing experience with Gary so far.

Gary does an amazing job at keeping his subscribers looking at the big picture and keeping us focused on riding out this once-in-a-lifetime bull. He has as much patience and class as anyone out there, and is extremely dedicated to his work.

I have run the spectrum as an investor over the last decade...swing trading, shorting, options - you name it, I have done it. I was sick of only making average returns, and being human my discipline and position sizing would fail no matter how determined I was to do the opposite.

Luckily through a friend I was introduced to the long term thesis in gold and started visiting sites such as jsmineset and thankfully, Gary's site during 2008. Even though miners and gold had a down year, I had already decided to move into the "value" category as an investor. I am never an instant convert to a new viewpoint. However, Gary has a simplicity and patience to his approach that you will only find in the great investors (and I have had personal meetings with Warren Buffett many times).

I became a subscriber, and investing since early 2009 has been the easiest and most worry-free thing I have ever done. I don't fight the trend, I don't try to outsmart the market or the crowd, and I have more time to spend with my family and my hobbies. I add when the market drops on intermediate cycle lows (such as the one coming up), and even if I am a little early or late I don't stress out.

I have long since achieved "strong hand" status, and those that sell or short or get margin-called are giving your shares up to people like me. When you own TGB at 1, HL at 2, UXG at 1.5, SLW at 6, GSS at 1.25, NG at 2, NGD at 1.5 among many others, and your portfolio is up over $5 million in 1.5 years, it doesn't matter in the short-term who is right or wrong because people like me aren't going to sell, even if gold or miners drops 50%, I'll just buy more (and I'm not even a hedge fund, though I'm very blessed).

I'm not bragging, because I've lost my shorts shorting and using options early in my investing career, but instead I'm encouraging you to change because its the best move I ever made, and I'm lucky I did it at the right time. I respect all viewpoints and those that love to watch the market, but if this is truly all about making money, then there is one easy way to do it and Gary will keep you on track.

All the best to each of you, I know where I will be in a few years, and I hope you're on the beach next to me...

A constant bear's lament in 2009 (one of several, made at times by myself) was that up-volume was pitiful and participation only ramped up for selling. That didn't end up stopping a 550-handle year-long run.

Still, when you're trying to position yourself in front of the crowd, you'd like the crowd to show up at some point. :-)

Okay, Gary, let me ask you to pretend to be a trader for a moment. ;-)

We've got a low-volume reversal day in response to a pop in overnight gold.

Pulling back, $GOLD is trading within a large rising wedge (two of them, actually). The $GOLD daily still looks like a bear flag. The action certainly seems to suggest a continuation crawl underneath the 50dsma.

Now, I know your long-term view, and I'm not challenging it, I promise.

That said: If someone were looking to press long in anticipation of a cycle low at this point, I wonder if awaiting additional upside confirmation wouldn't be prudent. Ideally a strong move and close above the 50dsma for starters.

Okay, the gold buggers think the dollar will be worthless and that is why they're getting into gold. So within a few years when you unload your gold (GLD) and silver (SLV) onto the poor average unsuspecting joes when the bubble gets hot and heavy, you get your funds transfered to your brokerage accounts in supposedly the worthless fiat Dollar. Is there a joke there I missed?

LIke I always say in a purely fiat system deflation is a choice not an inevitability. And Bernanke has made it clear he will not suffer deflation. Right now the banking system is getting Bennie's free money and they are pushing it into the asset markets.

That's whjy oil has gone from $35 to $80 despite an ongoing recession. It's why the stock market has gone from 666 to over $1200 and it's why gold is over $1200.

If need be the government will print money and mail out checks (remember the rebate checks). Deflation will just not be allowed.

Gary,About Chasing: That IVN I wanted to get at $14.60 yesterday morning is just on a tare... I had IVN way back when it was $8 but got shaken out. I didn't know about your blog back then.... There will be many more shoulda coulda's in the days ahead but I agree that sitting tight may pay off very well in the months and years ahead.Pepto bismal in the meantime.

Anon-I am assuming you are referring to the worries about weaker economic growth going forward. I have not read the minutes, just heard the headlines. my point being is if growth going forward will be weak for years than the chances of deflation are greater which means Bernanke and the Fed will err on the side of extra stimulus. Herego, good for PM's Right?

Who can recall the last time the Fed predicted a negative scenario 5-6 years into the future? It's ridiculous. They're politicians and nothing more, manipulating the sheep into more dollar debasement via another QE. As it is, they don't even need to have us agree, as they can print money and buy all the debt they want, in taxpayers' names.

The Fed just prefers to have it on record that Americans begged for relief, which they generously provided.

Dollar has serious support at 82. Euro strength will buckle at about that time. This will give gold a few more up days to about 1232 max and then a sharp sell off to retest its trend line from November 2008. This will most likely coincide with a wicked little sell off in the S&P500 which should take place in about 3 days. Hold on to your hats. Gold's retesting of the November 2008 trend line must hold or we could suffer a very sharp near term sell off. I don't like to see the trend line tested so many times in such a short period. That does not indicate strength, but rather doubt. Just my two cents.

^I wouldn't brag about being 100% long. If you don't hedge it is only a matter of time before you destroy your account. Might be 6 months from now. Might be 6 years from now. You can't possibly know when in these volatile and manipulated times.

6 months or 6 years from now, we might be up several hundred percent, before this decline you refer to. The strong hands are the ones that keep most of their money and the only way to do that is to be on the right side, not guessing the next big reversal.

^A few months is far too short a time span to make such a judgment. And if you didn't notice gold began to have a cow in mid May. Gold has 'decoupled' from the dollar before only to swing back into sync violently.

May was just a normal daily cycle correction. They happen like clockwork about every 20 days.

At the present time gold is working it's way into a larger degree correction that happens about every 20 weeks. As this is week 23 we are now getting very late in the cycle. It could bottom at any time and may have already bottomed.

The fact remains that the dollar isn't really strong. Let's face it you can't print several trillion dollars out of thin air and end up with a "strong" currency. The world just doesn't work that way.

Gold has been telling us very clearly that the strong dollar is nothing more than a mirage.

Your prediction that stock bears would be slow to buy into the move up in prices seems to be correct.

The Hulbert data showed that newsletter writers actually increased in bearishness from -6.5% last week to -12.7% by the end of Monday.

The Rydex ratio indicates slightly less bearishness now, moving from -16% last week to a still bearish -7.8% through yesterday. These guys are usually quick to embrace a move up, and this is unusual bearishness for them.

The Investors Intelligence readings through yesterday show a plunge in bullishness from about 41% bulls last week to only 32.6% bulls. That is quite a move for these investors because 25% of them are perma-bulls. Of the remaining bulls, it looks like at least half capitulated this week.

My favorite indicator is the OEX options traders. These large, usually always correct traders, recorded 14 consecutive days of buying more calls than puts, a streak that included 10 consecutive down days for the OEX 100. That streak ended yesterday when they bought 102 puts per 100 calls. Their 15 DMA is currently 78.4 puts per 100 calls, a very bullish result.

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